LaytonEco2ePP_Ch16 - Chapter 16 Macroeconomic policy I:...

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1 Chapter 16 Macroeconomic policy I: monetary policy
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2 Key concepts What is money? What is the demand for money? What is the money supply? What is the equilibrium interest rate? How is monetary policy implemented? What is the transmission mechanism? Other aspects of Australia’s financial system.
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3 The goals of monetary policy Australia’s central bank  (the RBA) has  responsibility for the determination and  implementation of monetary policy. Since 1996, its goal has been to keep  inflation  between 2 and 3 per cent  over the  course of the business cycle. With inflation low and stable, economic  growth will be higher and unemployment  lower in the long term.
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4 The Keynesian view of the  transmission mechanism Changes in monetary policy first affect  interest rates , which affect consumer durable  expenditure and investment demand. Through a  spending multiplier , this affects  aggregate demand in general, resulting in  changes to real output, employment and  prices.
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5 The Keynesian view of the  transmission mechanism (cont.)
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6 The monetarist view of the  transmission mechanism Changes in money supply directly affect  changes in aggregate demand, and therefore  changes in real output, employment and  prices.
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7 The monetarist view of the  transmission mechanism (cont.)
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8 The equation of exchange The equation of exchange is an accounting  identity that states that the money supply times  the velocity of money equals total spending. That is:
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This note was uploaded on 09/06/2009 for the course MGMT econ taught by Professor Galinaivanova during the Spring '09 term at University of Central Arkansas.

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LaytonEco2ePP_Ch16 - Chapter 16 Macroeconomic policy I:...

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